Mike Bloomberg today has a very
important speech advocating a carbon tax; he explicitly prefers it to a
cap-and-trade approach. I’m very glad that Bloomberg and other civic leaders
are pushing hard on this, even as I disagree with him on the subject of cap-and-trade.
The NYT’s Sewell Chan tries to get to the nub of the argument, but fails:
Most economists consider a carbon tax a more effective instrument for reducing
greenhouse gas emissions than the other major policy alternative, a cap-and-trade
system that would require plant-by-plant emission measurements and could prompt
companies to cheat.
This is just silly. You can’t tax something without measuring it; both a carbon
tax and a cap-and-trade system can be implemented as far upstream or downstream
as you like. So the measurement and incentive-to-cheat problems are the same
in both cases.
Now the vast majority of Bloomberg’s speech makes a great deal of sense. He
comes out strongly against subsidizing corn-based ethanol, for instance –
something he has the luxury of being able to do because he’s not worried about
Iowa primaries. And his arguments against a cap-and-trade system are certainly
If all industries are going to be affected, and the worst polluters are going
to pay more, why not simplify matters for companies by charging a direct pollution
fee? It’s like making one right turn instead of three left turns. You
end up going in the same direction, but without going around in a circle first…
The costs will be the same under either plan — and if anything, they
will be higher under cap-and-trade, because middlemen will be making money
off the trades. (I happen to love middlemen. They use Bloomberg terminals
and support my daughters. But what’s right is right!)
I do understand this argument: a carbon tax is simple, whereas a cap-and-trade
system has a lot more moving parts and therefore has a greater chance of underperforming
its potential. But Bloomberg does set up a bit of a straw man when he attacks
cap-and-trade: he seems to believe that a cap-and-trade system would generate
no revenue for the government, while any good cap-and-trade system would in
fact auction off emissions permits for many billions of dollars.
And when Bloomberg says that a carbon tax would result in "greater carbon
reductions for the environment," I’m not convinced. It seems to me that
if you want to guarantee carbon reductions, you should cap them, rather than
simply taxing them. But I’m still open
to persuasion. Can someone show me the argument which compellingly demonstrates
that a carbon tax would reduce carbon emissions more than a cap-and-trade system?